If the debt and the deed remained with the original lender after a charge-off, the lender, in all likelihood, still has legal claim to your deed. If your debt was sold to a third party subsequent to the charge-off, and the deed was not duly transferred, the third party may have a legal claim to your debt, but may not have claim to your deed.
Status of a Charged-Off Debt
The charge-off does not mean that you no longer owe the money. After the charge-off, the lender will likely pursue one of two options. The first is to appoint a third party as an agent (collection agency) to collect the debt while keeping ownership of the debt and a security interest in the debt. In this instance, the charged-off lender still has a claim to your deed. The second option is for the lender to sell the debt to a collection agency. In this instance, the collection agency may not have claim to your deed, depending on what happened to the security interest.
Deed vs. Mortgage
The mortgage instrument consists of two documents. The first document is your promissory note. It is your signed proof of the debt -- your IOU. The second document is the security instrument. The security instrument is your assignment of title (deed) to the property as collateral. This second document is called a "deed of trust" in some states and a "mortgage" in other states. Deeds of trust and mortgages are essentially the same because they are both security instruments. However, they confer somewhat different rights to borrowers and lenders in the event of default and foreclosure.
Selling Charged-Off Mortgage Debt
If your original lender sold your charged-off debt to a collection agency, the agency presumably bought both the IOU and the security instrument. In this case, the collection agency must duly register its proof of ownership of the security instrument with the local county recorder of deeds where your property is located for the collection agency to have a secured interest (legal claim) in the property. In this instance, the collection agency has a claim to your deed.
Separating the IOU From the Security Instrument
If, however, the IOU and the security instrument are separated during the sale of the charged-off debt, this creates what is called a nullity. There is no longer a security interest in the debt. Consequently, the collection agency becomes the owner of unsecured debt.
The net effect is that the collection agency has a legal claim to your debt, but not to your deed. Conversely, if the lender sold your IOU, but kept ownership of the security instrument, the lender no longer has proof of the debt and may not have a claim to your deed either. Several court cases since the mortgage crisis starting in 2008 have found in favor of the borrower because the lender could not produce proper documentation to substantiate the debt.
Find Out Who Owns Your Mortgage
You have a right under the Real Estate Settlement and Procedures Act to know who owns your mortgage. If you are unsure, find out. This could be a difficult task because mortgages frequently change possession. For help in pointing you in the right direction, contact a real estate lawyer or your local Legal Aid Society.
- Georgia Attorney General Sam Olens: Mortgage and Foreclosure Information
- Georgia Code 4-14-64: Transfer of Deeds to Secure Debt
- DTC Systems: Split: The Note and the Deed of Trust (Redux)
- Huffington Post: Who Owns Your Mortgage? "Produce The Note" Movement Helps Stall Foreclosures
- Q-Law Blog: The Meat of the Matter – In Re: Veal Analyzed
- Law Offices of Peter N. Brewer: Bankruptcy Courts Enforce “Produce the Note” Defenses by Borrowers
- Hemera Technologies/AbleStock.com/Getty Images
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- Does Declaring Bankruptcy Include Forgiveness of Mortgages?
- The Difference Between Unsecured Debt & Secured Debt
- Can a Creditor Sue After Selling to a Collection Agency?
- Do I Have to Pay Back a Second Mortgage If the Property Is Foreclosed On?